Trade-off between Equity and Efficiency

It seems that we have taken the trade-off between equity and efficiency in microeconomics for granted. Free market can achieve allocative efficiency at the expense of equity, whereas government may choose to sacrifice efficiency in exchange for equity. The trade-off between these two goals is obvious from empirical evidence; we seldom ask ourselves why this is the case. Although what came into my mind today cannot thoroughly answer this question, I felt inspired to talk about it.

Let us first ask ourselves how equity and efficiency can be achieved in idealistic sense. Here, I would like to use the concepts of "original position" and "perfect competition" for illustration.

The original position is a thought experiment proposed by John Rawls to develop principles of justice and equity. Under the original position, individuals are assumed to be both ignorant and rational. As suggested by "the veil of ignorance", individuals have to be ignorant of their own particular circumstances (including talents, social status and conception of good) to avoid bias. Moreover, they are supposed to be rational in the sense that they seek to maximise their self-interest/minimise their own loss in decision-making. Only when a group of rational people are ignorant of their individual circumstances can they develop principles of justice, which treats everyone equally and will not make anyone worse off.

Perfect competition is another thought experiment to attain allocative efficiency. The two underlying assumptions are rationality and perfect information. I shall not explain how price mechanism works in a "free market with perfect competition" to guarantee efficiency. Any guidebook or textbook on microeconomics can do a much better job than me. The importance of the aforementioned two assumptions is also well elaborated in economic terms in those books. If you do not bother to read any economics book, please bear with my vague explanation in layman's term. The assumption on rationality ensures that welfare maximisation (i.e. pursuit of allocative efficiency) is desirable and desired, whereas the assumption on perfect information makes it possible for people to achieve efficiency. In other words, the assumptions on rationality and perfect information make sure that people are both willing and able to achieve efficiency.

What we have discussed so far can be summarised in one sentence: "rationality and ignorance" is needed for equity, whereas "rationality and absence of ignorance" is needed for efficiency. Haha, it is interesting to see how the pre-requisites for equity and efficiency contradict each other. Given that ignorance and absence of ignorance cannot coexist, it is impossible for us to achieve ideal forms of equity and efficiency at the same time. In reality, we are neither ignorant nor omniscient and thus, real life is always the case of "a mixture of equity and efficiency" and there has to be some trade-off between equity and efficiency. We may further infer that the extent of equity or efficiency depends on the amount of information available to individuals, won't we? It seems to be a big jump and require a lot more discussion, doesn't it? I shall leave this question for another WONDERFU or DREADFUL or ...FUL day= =

Anyway, I found it fun to discuss about this trade-off (you can read it with a pinch of salt...). Before I end this essay, I would like to pose another random but somehow related question: what if people are irrational+ignorant or irrational+omniscient?

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Comments

  1. An intriguing discussion is definitely worth comment.
    I do believe that you should publish more
    about this issue, it might not be a taboo matter but usually folks don't
    talk about these topics. To the next! Kind regards!!

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